Podcast May 30, 2023

Not just a lifeline: the outsized role of remittances in global development

According to the World Bank, remittances to low- and middle-income countries grew an estimated 5% last year, to reach $626 billion. That’s over three times the amount developing countries receive in official development assistance and foreign direct investment combined, underscoring just what a vital role remittances play in supporting these economies.

For millions of households and communities around the world, the money they receive from relatives working abroad is essential to their survival. It feeds them during times of economic hardship, and provides a buffer in the face of emergencies, such as drought, war, or the Covid-19 pandemic. It pays for medical expenses and it funds children’s education. And as climate change contributes to greater food insecurity and economic instability, The United Nations Development Programme anticipates that remittances will play an increasingly important role in supporting affected families and communities.

From surviving to thriving

However, remittances don’t simply provide a lifeline to people living in poverty — they also strengthen the economies of the developing countries themselves. According to the UN, while approximately three-quarters of remittances are used to keep families afloat, the remaining 25% is saved or invested in assets and activities that generate incomes, create jobs, and help to transform local economies. 

In this week’s episode of Payments Innovation, host James Teodorini was joined by guests Camilla Bullock, CEO and co-founder of the Emerging Payments Association Asia, and Artak Melkonyan, Senior Advisor on Equity, Financing and Funds at the United Nations Development Programme (UNDP) Sustainable Finance Hub. They discussed the role that remittances play in enabling communities to lift themselves out of poverty, with Teodorini observing that “this isn’t just about survival, which is often the way we think about remittances. It’s about people in really desperate need being able to thrive, not just survive.”

Bullock agreed, explaining that “remittances enable education or micro-investments into smaller agriculture companies, (meaning) a few dollars can mean so much more for a market and help them become a stronger economy.

Indeed, according to Melkonyan, remittances are so important to the socio-economic development of developing countries that an increase of just 1% in international remittances as a percentage of GDP could lead to a 22.6% decline in the poverty gap ratio, a measure of poverty intensity, making remittances “the most stable, impactful financial instrument” in those economies’ development.

The high price of sending money home

But remittances are expensive: currency conversion rates and fees are on average around 7% of the total transferred. Many bank transactions are typically more expensive than those sent through digital channels, while a lack of access to financial services among certain beneficiaries means many payments are sent outside official channels, which are costlier still, not to mention more risky. 

In Venezuela, for example, a lack of formal payments infrastructure sees intermediaries charge as much as 20% to handle remittances, while in Afghanistan an informal money transfer system, known as hawala, has been linked to crime and money laundering. In these instances, money that could be going into the hands of families that need it — and helping to transform the local economy — is instead used to line the pockets of money-brokers.

Driving sustainable development with innovative payments solutions

It is for this reason that the UNDP has made cutting the cost of remittances to below 3% a key part of its Sustainable Development Goals for 2030. Integral to this plan is a competitive remittance market that makes use of innovative payments technology, such as mobile payments and digital tools, to reduce costs and improve the speed and efficiency of transactions. Education and skills training are also considered essential tools in improving the financial literacy of beneficiaries, enabling them to become better savers and investors, and giving them improved access to financial services. 

For Bullock, bilateral agreements between nations are another important way to reduce the fees people pay to send and receive money. Bullock pointed to the Unified Payments Interface (UPI), which facilitates free peer-to-peer payments between India and Singapore, as a way in which increased connectivity between domestic payments systems can put more money into the hands of the people that need it.

“UPI is really a game changer for remittance,” said Bullock. “The cost before was substantial, and now it’s free. In our region, we have several of those bilateral agreements coming into place.”

As these bilateral agreements open up more cross-border payment corridors, more remittances will be brought into official, safe and regulated channels, helping to drive down costs. With $8.5 trillion projected to be paid in remittances by 2030, that will result in a great deal more money reaching the families that need it, with a significant portion of those funds being saved and invested in turn, helping to strengthen economies, and, gradually, lift more developing countries out of poverty.

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Until next time!

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